What would be the world's biggest ever securitization an $8 billion transaction intended to compensate Spain's electricity providers for competition transition costs is still possible, according to bankers working on the deal, despite an announcement from the European Union's competition authorities suggesting that such a deal could be illegal.

The intended transaction, which is being worked on by Morgan Stanley Dean Witter, Banco Bilbao Vizcaya and Banco Centro Hispano, would securitize a levy on individual consumer's electricity bills. The cash raised would then be paid to Spanish electricity companies in compensation for investments made before the introduction of more competition into the industry.

However, the E.U. competition commission recently said that any payments to offset the costs of deregulation count as state aid and are therefore not allowed.

"These levy-based schemes they've introduced to compensate different expenses are considered as being state aid," which is illegal if it distorts competition, explained Costas Verros, spokesman for E.U. energy commissioner Christos Papoutsis.

The Spanish government, though, has said that the deal is legal under an E.U. directive allowing governments to take measures to cushion utilities from competition.

The bankers are caught in the middle, but are convinced that a solution will be found. "There is compatible state aid and non-compatible state aid, and this is a question of making sure that this deal is compatible," said a London-based banker.

A banker in Spain agreed: "The deal will be possible, it's just a question of getting some kind of agreement as to what is allowable and there is no reason to expect that the deal will have to be much smaller."

Outside observers, however, suggested that the transaction was now far from certain something reflected in the share prices of the companies that expect to receive the compensation payments.

"There is a risk that they may not get part of these payments and we are not going to see stocks performing well until there is a definite decision on what will happen," said Khaled Beydoun, a utilities analyst at HSBC Securities.

The transaction has been dogged by controversy ever since it was announced in October last year (ASRI 10/5/98 p. 3). The enabling legislation had a hard time getting through the Spanish parliament (ASRI 11/2/98 p. 2 and 22/2/99 p.3) and the deal itself was bitterly attacked by the then regulator of the Spanish electricity industry, Miguel Angel Fernandez Ordonez (ASRI 11/1/99 p. 6).

However, the prestige of closing the world's biggest securitization not to mention the fees will no doubt make all the hassle worth while for the bankers, when and if the deal makes it to market. MD

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